>> well, not necessarily. i think there's something that we should throw out here as a caveat, it's we're in the summer season right now, it's a little bit of the doldrums so the volume isn't quite address high. there's some things we can read into this and maybe some things we shouldn't. one thing i would point out, though, is volatility, and i'm talking about realized volatility, how much the market moves up and down generally tends to go down before anything else we see, as volumes are dropping, it's been confirmed by the economic data we're seeing and i expect that to continue. so if the unemployment figures, which are the big thing that everybody's concerned about, as long as volatility continues to decline, i'm talking about realized volatility, stay away from the vix for a second, i would -- >> how do you see realized volatility? most people know the vix, they can see the vix, pull that up, realize volatility is -- >> how much the market moves every single day. you don't need to quantify it, only to make observations, do we have really violent moves? what we're seeing now are the

movements in the market are actually less than the ones suggested by options prices. and what i would expect to see is the last bits of economic data that are going suggest that we're coming out of this will affirm that. >> dan, what do you say? >> i'm a bit of a skeptic here, i think some of this data is the housing data this morning, the numbers were better, the average prices were a lot lower, and that may not work out so great for homeowners and consumers as we go forward. as far as we're breaking out, technically things look great, some of this data like we just said, confirming some of this technical breakout, like i said, i'm a bit skeptical. that said, there was a couple interesting trades this week with implied volatilities coming in. i sound like a bank of america, for instance, there was a buyer of good side, 17.5 call spread, they paid $1.50 for that, max gain is $3.50, if the stock is above 22.50 on january expiration, and the next one was also on bank of america and this one was more interesting, it was

the january 2011 30-35 call spread, up 100% from current levels, and the investors paid 50 cents for this trade, you could make 4 looking a year and a half out. i don't have that crystal ball like that. >> it does back it up. >> i'm just skeptical. these are trades i saw in the market today. >> melissa, to dan's point, some of the trading is more interesting trading is the longer data type of trading. you're seeing january 2010, january 2011, there's a big concentration in october, november, and december options right now. to mike's point about how the market is moving right now. the vix right around the 2425 level, again that's going to suggest to us we should see around 1.5% move one to two times per week. we're seeing that, there's really nothing to suggest the vix should be significantly higher. and i agree with mike's point, if anything, we could see the ball coming out a little bit. a couple of things this week, look at the international

markets, that moved the markets. some of that is known. you know, the market is pricing in that you may wake up one day and there will be some movement in the market. one of the points i would take away, the next couple of weeks, there's nothing in the options market to suggest there's going to be huge movements, there's no catalyst on the horizon to suggest there's going to be this big movement. i'd rather look for volatility levels that look elevated on a relative basis and sell those options versus looking for those that look inexpensive on a relative basis to buy those for protection. >> scott, how are you reading the tea leaves? >> you know, it's interesting, the new is it hasn't come in, even though it's higher this week, that is way out of character for this market. it tells you there is not supplc of options. that is the people who would normally come in and sell c options for hedge funds are on c really short leash and they just don't have those -- the ammunition.c and we saw that played out when upside calls and the spx got bit

up a little bit today, 10.50 and $11 calls got bit up, people c trying to buy them for stock c replacement, and people normallc rushing to sell those are on a c pretty short leash given what c we've just seen. it's a little bit trying to buy hurricane insurance right after the hurricane has come through, none of the insurer haves any money so they're not going to write new insurance, that's why we see the vix still pretty high. >> stacy, you are the skeptic here, you don't necessarily believe the markets are going to move too much. overwriting is a great strategy to employ, to collect some premium, and specifically norfolk southern is your trade. >> exactly. you could pick a number of railroad stocks here, the industrial sector tends to be elevated, norfolk southern is one name i would concentrate on. i was looking for the stock around 47 and change today, it was the september 50 call, an 85-cent bid. now one of the reasons i chose september, goes to the point i just brought up, over the next couple of weeks, i don't see a lot of catalyst, broad market or specific to norfolk southern. one of the things you're going to look at here, by selling that

call at 85 cents, take in that premium, if we do get a huge market rally, if we continue to bust out as dan thinks is a possibility here. if we continue to go significantly higher, your stock will be called away up around 7.5% to 8%. on the flip side, if we trade sideways over the next couple of weeks, you're going to collect that premium which is around 2% premium for the next 30 days. i think it's an attractive strategy as everybody heads to the beach. i want to look to the options to still help me make money on stocks that i own. >> you know, i would say that first things first, i don't exactly think we're going to bust out -- >> fair enough. >> i'm not bullish by any means. i think we're at an inflexion point and maybe we tip the scales a bit and we do take off. that sort of strategy is creating a buffer against a stock that you own, i like those strategies, we have to look to trade tactically around stocks that we own. i like those strategies. and stacy does a great job of identifying some options that are mispriced on a relative basis to some other sectors or some other peer groups.

>> and, of course, this is a strategy, mike, that anybody can employ with any stock that they hold that they don't necessarily believe is going to make a huge, giant move. >> no, that's absolutely right. this is a yield enhancement strategy, as dan pointed out, a way you can hedge yourself to the downside, this is a strategy you should look to employ. particularly in markets where you think, perhaps, we are going to see a little bit of stabilization happening in here, we're not going to break materially higher and not enjoying to fall completely out either. a situation you want to revisit. >> got to move on to the next option. stacy's overwrite provided downside protection but options are a fantastic tool for protecting your entire portfolio. time for a little putting off the risk as we referenced at the top of the show, prices for options have decreased, that makes protection easier, cheaper to buy. dan, you've actually got a trade that can protect your portfolio and it doesn't cost that much right now. >> it doesn't cost you a lot at all. here's one of the things, everyone wants the market to go up. we all own stocks and want those stocks to appreciate.

but sometimes -- and we all got to know this clearly in the last basically two years, markets go down and some stocks act really, really poorly. so a strategy that i want to do, rather than maybe just overwriting a bunch of different stocks in your portfolio and making -- that could be pretty tedious. one of the things i want to suggest is basically using the s&p 500 etf, the spider, the ticker is spy, i close about 102.50 today. so i'm going to look out to the december quarterly spyder, that etf option expires on december 31st. what i want to do against a portfolio of stocks, i want to do a december quarterly 190 one buy 2 put spread. what am i doing? i'm paying 30 cents that entire package, buying one december 100 put for 5.30 and selling two of the december 90 puts for $2.58, that's a combined $5, like i said the package cost me 30 cents, if the market goes up and all your stocks keep going, great for you, you spent 30

cents on protection to the downside that would start protecting you down 2.5% or so and give you really a good amount of protection to about 900 in the s&p, that's about 12% lower. also offers you protection down to about 800, down about 22% from here. it's just a really cheap way to put protection in the portfolio. >> this is a strategy i like. one of the quick points i would make is, you really do need to take a look at how much capital you have in a situation like this because obviously if the market does break materially lower, a couple things are going to happen. for one thing, the two puts that you sold are going to go up in value as volatility increases. you need to be prepared to go along the market. if we do see a pullback, i don't think that's going to happen. but like this strategy, he's using this opportunity to finance downside protection. >> yeah, i think mike hits on a key point. i really like the strategy, as well. as long as you know the risks going into it. and i think dan laid it out well.

one of the things important, your margin requirements for selling those two puts, just realize it's going to take up some margin here. two to mike's point, if we fall out of bed, you're going to be sad to have this on versus owning a put outright. that being said, you know your risks going into this trade. i think it's an attractive trade. >> got to move on here. ♪ anything you can do i can do better ♪ >> wow, that would be ethel murman. she's singing anything you can do i can do better. options and ethel murman an unlikely pair, a winning combination. perhaps a subtle acknowledgment that "options action" is a broadway show tonight, but it's time for good old fashioned cable news smackdown using derivatives. time for "put up or shut up," they duke it over the specific strategy. last week they nailed target. can they go two for two? tonight we talked to dell, the computer maker will report earnings on thursday. both dan and mike think the stock could have a big move even

though the company preannounced lousy results back in july. both feel the stock has hit some sort of inflexion point and both think dell could benefit from an economic recovery. but that's where the similarities end. let's talk options. so a big move. dan, kick it off. what's your strategy? >> well, you know, we've had a lot of information on the company that held an analyst meeting in mid-july, preannounced the earnings, we saw hewlett-packard report and give guidance the other day. there's a lot of news out there, and most option traders would say i almost want to sell the options around this event because i'm not expecting a whole heck of a lot. and the implied move isn't that high. but what i want to do with this stock is actually gun through, you know, technically it's made a lot of higher highs and higher lows over the last six or seven months. stock's up 42%, almost double what hewlett is on the year. there is a positive scenario. >> what's the trade, dan? >> oh, all right. here's the thing. >> you're running out of time, buddy, i'm trying to save -- >> what i want to do is buy a strangle in september on dell

computer, i want to buy the september 14 put for 45 cents, i want to buy the september 15th call for 45 cents, that whole package cost me 90 cents, if i break even to the downside, 1310, about 10% lower and about 1590, about 10% higher to the up side. >> enough. enough. >> i tried to give you the cue, dan. i tried my best. okay, mike, it's your turn. >> well, i've got about two seconds, right? after what just happened there. you know, a quick point i want to make, we've said two things on this show, one of them is that we think volatility could continue to come out of the market. second thing is the catalyst here, well they've already given us some guidance on what's going on. i don't necessarily know. if you want to buy a whole lot of premiums, spend a whole lot of money going into something like this. so while i do feel like the stock hasn't necessarily found its level, i think one of the things you have to do if you're going to buy options, expecting the move, pick a direction if you can. because nine times out of -- not nine times out of ten, but

certainly more often than not, probably 58% of the time, if you try to go out and buy a strangle anticipating a move, you're not going to win. >> give me the trade, mike. >> the 15 call, you have downside protection in the sense that the stock falls out of bed, all you lost is your premium but unlimited up side. 45 cents is your -- >> stacy's mike trade is a bit simpler there. who are you going to side with this week? >> i just am so hard pressed always to find a strangle i really like. one of the things i would say, i think dan's points are valid, the implied move is on the low side, i agree with mike, if i like volatility, i want to pick a direction. at one point i threw out as an alternative to mike's trade, if if you're long the stock, you can consider that put. if you're long the stock and own that put versus owning that call for an up side position. i'm going to have to go with the single option over the double. >> scott, where do you stand? >> you know, i think is interesting. i think mike's idea that you need to take a direction actually makes a lot of sense here because it is so tough for strangles to make money.

and let's go with the trend. the trend is higher, bad news for stocks, but they continue to march higher, let's get on board. >> poor dan, poor dan. all right. disagree with stacy or scott? got a question about options, send us an e-mail. the address is optionsaction@cnbc.com. up next, dan and mike correctly called target's move on earnings. those shares are up 11%. but their options trades were both up more than 100%. how did they do it? find out after the break. time for pump up the volume, the names that were heating up options traders sizzle index this week. this video game publisher is best known for the shockingly violent franchise grand theft auto. but the real prize was the performance of video games this week after new data showed the fifth month of sales declines. call buyers went crazy. who is it? the answer when options action returns.

where were options traders pumping up the volume this week? take two interactive. call activity in the video game maker was four times the average volume. welcome back to "options action," winners are always nice, but how about two winners? yes, time for the upside call times two. you heard dan and mike go at it over dell, well last friday they

went to duke it out over a retail name and came up on target. on "options action," we're looking for ways to make money and last week dan and mike were bullish on target and both made money, but that's where the similarities ended. dan went for a call spread. >> what i want to do is buy an august 4244 call spread. >> and here's how his trade worked. when traders buy a call spread, they buy one call and then help pay for it by selling another call of the same expiration. in the case of dan's trade, he thought target stock would rally on earnings, so he paid 85 cents to buy the august 42 strike call, to reduce his cost, he then sold the august 44 strike call and collected 20 cents. between the 85 cents he paid and the 20 cents he collected, the total cost of the trade 65 cents. that's the most he can lose no matter what happens to target.

but his upside is limited to the difference between the strike for the call he bought and the one that he sold. dan thought target was heading higher, why would he sell that call and limit his profits? because he felt that target wouldn't trade much higher than $44. so by selling that higher strike call for 20 cents, he reduced the cost of his trade by nearly 25%. mike made a similarly bullish trade but he did it selling puts. >> anybody who has ever watched knows that i typically don't like buying vertical spreads going into a catalyst and so in this particular instance i'm actually going to sell a vertical spread, sell the 42-40 put spreads. >> in the case of mike's trade he sold for $1.05 and bought the august 40 strike put for 35 cents. collecting 70 cents on the trade. that's the most he can make on that spread. in order to make that money he needs target to stay above the

$42 level. anything below that and his trade begins to lose money. but if mike were bullish on target, why did he buy that 40 strike put? because by purchasing that put he protects himself if the stock falls through the 42 strike put that he sold and defines his maximum risk. but mike wasn't happy just making 70 cents. so he gave in to greed and used that money he collected to buy a call. >> i'm going to buy the 43 call and the upside is unlimited. >> since the time of the trade, target has rallied 11%. making both mike and dan winners. one trade, two strategies and a heated debate that even involved their mothers. >> my mom's wondering why you never picked my trades either. >> i hope your mom will give my mom a call. >> now moms around the world are glued to "options action" and with expiration having come and gone they want to know the same thing, which one of these two mama's boys made the most money? don't want to keep the moms waiting, that's what my dad

taught me. let's get straight to it, dan's call spread risk $65, made $135, more than double his money. mike's trade risked more but he made more with about $285 in profit. congratulations to you both. good trades. but how did the expiration impact what you did with it? >> the stock was immediately over the higher strike i sold and you sell that or leave it if you feel comfortable between now and expiration, only a few days. the thing about mike's trade, i risked less, i was a tactical trade, using an organ up here, he was using an organ kind of below the belt. >> what organ are you talking about? >> wait a second as far as the risk is concerned, risk less on an absolute basis. if the stock stayed exactly still i was going to make money and you weren't. so part of it is the risk/reward relationship, the thing you want to pay attention to, not just what absolute risk but what the likelihood is. that's one of the reasons i

implemented the trade i did. >> stacey, which organ was mike using? >> i think he was using his brain on this one. i liked both trades. congratulations to both guys here. to dan's trade i liked his point once he blew through the strike. to mike's point, you probably could have chosen any point this week to sell out of that option if you wanted to. >> send us an e-mail, optionsax@cnbc.com, go to our website optionsactions@cnbc.com, right after the show.

time for the "final call" last word from the options pit. scott, kick it off. >> i'll watch volume and volatility. last week in august f we see a high volume day, that's the way you want to go. >> stacey? >> vacation time is upon us. i want to look to situations where vol is expensive. norfolk southern is my override opportunity of the week. >> dan? >> look to buy term life policies on your portfolio, december, 190, one by two put

spreads for low cost. >> mike? >> if you own norfolk southern, sell the september 50 calls and enhance returns. >> looks like our time expired. check out our website. see you back here next friday.

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